Canadian Corporate Tax for Foreign Companies
A licensed Ontario CPA on the obligation most foreign corporations do not know they have. If your company carried on business in Canada, it must file a Canadian T2, and that requirement applies even where a tax treaty exempts your profits from Canadian tax entirely. The exemption removes the tax. It does not remove the return.
Quick Answer
A non-resident corporation must file a Canadian T2 return if it carried on business in Canada or disposed of taxable Canadian property at any time in the tax year. Critically, that requirement applies even where the corporation claims its profits are exempt from Canadian tax under a treaty. To claim the exemption you complete Schedule 91 and attach it to the T2, along with Schedule 97. Separately, your Canadian customer is generally required to withhold 15% under Regulation 105 on fees for services rendered in Canada, and filing the T2 is the only way to recover it. There is a late-filing penalty written specifically for treaty-exempt corporations with no tax payable.
The Exemption Removes the Tax, Not the Return
This is the single most expensive misunderstanding in this area, and it is held confidently by people who are otherwise well advised. A foreign corporation looks at the treaty, sees that its business profits are not taxable in Canada absent a permanent establishment, concludes correctly that it owes no Canadian tax, and then concludes incorrectly that there is nothing to file. The CRA's position is unambiguous: a non-resident corporation must file a T2 if it carried on business in Canada or disposed of taxable Canadian property at any time in the year, and that requirement applies even where any profits or gains realized are claimed to be exempt from Canadian tax under a treaty. The exemption and the return are two different things. One is about what you owe. The other is about telling Canada what happened. Think of it this way: a treaty exemption is a claim, and a claim has to be made somewhere. The return is where it is made. Filing nothing is not a claim of exemption, it is an absence, and from the CRA's side an exempt corporation that filed nothing and a non-compliant corporation that filed nothing look identical. Our non-resident corporation registration and compliance service exists largely because of this gap.
What a Foreign Corporation Actually Faces
The obligations are separate, they are triggered by different things, and satisfying one does not satisfy another.
| Obligation | What Triggers It | Does a Treaty Exemption Remove It? |
|---|---|---|
| T2 return | Carrying on business in Canada, or disposing of taxable Canadian property | No. The return is required regardless. |
| Schedule 91 | Claiming a treaty-based exemption on a treaty-protected business or property | No. It is how the claim is made. |
| Schedule 97 | Being a non-resident corporation with a Canadian filing requirement | No. It identifies the income earned in Canada. |
| Regulation 105 withholding | Being paid for services rendered in Canada | Only via an approved waiver, obtained in advance. |
| Branch tax, Part XIV | Carrying on business in Canada through a branch | Commonly reduced by treaty, not automatically eliminated. |
| GST/HST | What you supply and where, entirely separate from income tax | No. An income tax treaty does not touch GST/HST. |
| Payroll withholding and slips | Paying employees for services performed in Canada | No. Slips are generally required even where the employee is treaty-exempt. |
Does Your Situation Trigger a Canadian Filing?
The question is what the corporation did, not what it owes.
| If Your Corporation... | Canadian Filing Position |
|---|---|
| Carried on business in Canada, treaty-protected or not | T2 required, with Schedule 91 where the exemption is claimed. |
| Disposed of taxable Canadian property | T2 required, subject to narrow exceptions. Notification and compliance certificate rules may also apply. |
| Was paid for services rendered in Canada | 15% withheld by the payer. The T2 is how the position is settled and any refund recovered. |
| Has employees performing services in Canada | Payroll withholding and reporting. Slips generally required even where the employee is treaty-exempt. |
| Operates through a Canadian branch | T2 required, and Part XIV branch tax to consider. Treaties commonly reduce it. |
| Earns Canadian rental income | Withholding on gross rent, with an election available to be taxed on net rental income by filing instead. |
| Only sold goods to a Canadian customer, no presence | Often no Canadian filing, but please confirm rather than assume. GST/HST is a separate question. |
The 15% Your Customer Is Holding Back
Regulation 105 requires every person paying a non-resident a fee, commission or other amount in respect of services rendered in Canada to withhold 15% of the payment and remit it to the CRA. Your Canadian customer does this whether or not you think you are taxable, because the obligation is theirs, not yours, and if they get it wrong they are the ones on the hook. It applies regardless of whether your own employees perform the services or you subcontract them. Two things about this withholding are consistently misread. First, it is not your final Canadian tax. It is held on account of a potential liability, and your actual liability is determined only when your Canadian return is assessed, which means you may owe more or be owed a refund. Second, and this is where the two halves of this page meet: if a treaty exempts your profits, the 15% that was withheld is money you are owed back, and the T2 is the only mechanism that returns it. The corporation that decides not to file because it owes no tax is not avoiding paperwork. It is leaving its own money with the CRA and accruing a penalty for the privilege.
| Regulation 105 Waiver | Treaty-Based | Income and Expense |
|---|---|---|
| The basis | No permanent establishment in Canada under the treaty | The withholding exceeds your likely Canadian tax |
| Requires a treaty | Yes, plus proof of residency and entitlement to benefits | No. Available where no treaty applies |
| What you must show | Treaty entitlement and the absence of a permanent establishment | Estimated income and expenses supporting a lower liability |
| When to apply | Before the services start. Well ahead of the first payment | Before the services start. Well ahead of the first payment |
| Applies retroactively | No. Only to payments made after it is issued | No. Only to payments made after it is issued |
| Removes the T2 obligation | No | No |
A waiver is worth having, but it must come first. You can apply to have Regulation 105 withholding waived or reduced, either on a treaty basis by demonstrating no permanent establishment in Canada, or on an income and expense basis by showing the withholding exceeds your likely liability. Waivers are not automatic and the process must be followed. Critically, a waiver generally applies only to payments made after it is issued, not retroactively, so applying after the first invoice has been paid does not recover what was already withheld. And please note a waiver deals with the withholding only. It does not touch the T2 obligation, which stands on its own.
Permanent Establishment Is the Question Everything Turns On
Under most of Canada's treaties, whether Canada can tax your business profits at all comes down to whether you have a permanent establishment here. No permanent establishment, and the treaty generally protects the profits. Have one, and the answer changes completely. This is why the concept deserves more care than it usually gets, and why the confident assumption is the dangerous one. A permanent establishment is broadly a fixed place of business through which the corporation carries on business, but it does not require a lease, a sign or a Canadian address. Treaties contain services provisions that can create one based on the duration and nature of activity in Canada, and the analysis turns on facts that accumulate quietly over a long project. The practical point is this: if the CRA later determines you did have a permanent establishment, the treaty protection you relied on falls away and the profits become taxable. A corporation that filed a treaty-based return is in a materially better position at that moment than one that filed nothing, because the position was disclosed on the record rather than assumed in private. The treaty pages on our site cover the withholding side in more depth. See our tax treaty benefits for non-residents.
The Penalty Written for Corporations That Owe Nothing
If the rest of this page has not made the case, this should. Canada has a late-filing penalty for non-resident corporations calculated on a per-day basis up to a capped number of days, and it applies specifically to corporations that are exempt from tax under a treaty and have no tax payable. Read that again, because it is not an accident of drafting. The ordinary late-filing penalty is a percentage of unpaid tax, which means a corporation with no tax payable would face nothing under it. The alternative penalty exists precisely so that a treaty-exempt corporation cannot ignore the return without consequence. Canada anticipated exactly the reasoning that gets foreign corporations into trouble here, and legislated for it. The exemption protects you from the tax. Nothing protects you from the penalty except filing.
The subcontractor reimbursement position has changed, and there is a date attached. The CRA no longer treats subcontractor fees paid to a non-resident for services performed in Canada as exempt reimbursements. Administrative relief for these amounts has been extended, with Regulation 105 withholding required and enforced on such reimbursements paid after March 31, 2027. If your Canadian arrangements involve subcontracted services and you are relying on the historical treatment, please have the position reviewed before that date rather than after. Please also note that if services are rendered in Quebec, an additional provincial withholding applies on top of the federal 15%, with its own separate waiver process.
What Trips Foreign Corporations Up
In our experience these are the assumptions that cause the damage, and every one of them is reasonable on its face.
- "The treaty exempts us, so there is nothing to file." The most common and the most costly. The filing requirement is independent of the tax outcome.
- "The 15% withheld covers our Canadian tax." It is a payment on account, not a settlement. Only the assessed return determines the real number.
- "We got a waiver, so we are done." A waiver addresses withholding. The T2 obligation is separate and survives it.
- "We have no office in Canada, so no permanent establishment." A lease is not the test. Duration and nature of activity can create one.
- "We subcontracted it, so Regulation 105 does not apply." The withholding applies to services rendered in Canada regardless of who performs them.
- "No tax means no penalty." There is an alternative penalty written specifically for treaty-exempt corporations with nothing payable.
Branch or Subsidiary
Where a foreign corporation intends to operate in Canada properly rather than incidentally, the structural question arrives early: run it as a branch of the existing company, or incorporate a Canadian subsidiary. They are taxed differently and filed differently. A branch carrying on business in Canada can attract additional tax under Part XIV, broadly intended to approximate the withholding that would have applied had the Canadian business been run through a subsidiary paying dividends out, and treaties commonly reduce it. A subsidiary is a Canadian corporation with all that follows from that. Neither is universally right, and the answer depends on what you are doing, for how long, and how your home jurisdiction treats the result, which is not a question that can be settled from the Canadian side alone. See our international tax planning and structuring and, for US-specific matters, Canada US cross-border tax planning.
Where This Usually Starts
Rarely with a tax question. It starts when a Canadian customer says they have to hold back 15% of the invoice, and the foreign company wants to know why and how to get it back. That single question opens the whole file: whether there is a filing obligation, whether the treaty protects the profits, whether a permanent establishment exists, whether a waiver is worth pursuing for the next contract, and whether the return that recovers the withholding is already late. It is a better conversation to have at the contract stage than at the refund stage, but either way the work is the same and it is entirely fixable. Where returns are already outstanding, coming forward before the CRA makes contact matters, and our voluntary disclosures program page covers that route. For the ongoing compliance itself, see our non-resident tax returns service.
Case Study: The Refund Nobody Claimed
A foreign company had been providing services to a Canadian customer for three years. The customer withheld 15% of every invoice and remitted it to the CRA, as it was required to do. The company's advisors, correctly, had told it that the treaty exempted its business profits because there was no permanent establishment in Canada. From that correct advice the company drew the wrong conclusion: no Canadian tax, so no Canadian return. Three years of withholding sat with the CRA, unclaimed, because the return that would have recovered it was never filed, and a late-filing penalty had been accruing against a corporation that owed no tax at all. We established the filing position, prepared the treaty-based returns with the required schedules, and set up the waiver process so the next contract would not repeat it. The figures here are illustrative of the work we do, not a specific client file. Non-Resident Corporation Services →
Canadian Compliance for Foreign Corporations
We establish the filing position, prepare the treaty-based return with the schedules that make the claim, recover withholding through the return, and set up waivers before the next contract. At flat-fee pricing including HST.
Treaty-Based T2 Returns
The T2 with Schedule 91 and Schedule 97, prepared by a licensed CPA firm so the exemption is claimed properly and on time.
Regulation 105 & Waivers
Recovering withholding through the return, and applying for waivers in advance so the next contract is not withheld against.
Years Behind?
Unfiled Canadian returns and unclaimed withholding are fixable. We establish the position and bring it current.
Frequently Asked Questions: Canadian Tax for Foreign Companies
The Exemption Removes the Tax. It Does Not Remove the Return.
Gondaliya CPA prepares treaty-based Canadian returns for foreign corporations, recovers Regulation 105 withholding, and sets up waivers before the next contract. Flat fee, including HST. 1300+ five-star reviews.